1. As with all financial decisions, a firm should try to set a capital structure that maximzes the stock price, or shareholder value. This is called the optimal capital strucutre; it is also the debt-equity mix that:

a. Maximizes the WACC

b. Maxmizes the net income

c. maximizes the dividends

d. Minimizes the WACC

2. Review the list and indentify which items are correct. Check all the apply.

a. An increase in debt financing increases the taxes that a company owes

b. a decrease in debt financing increases the risk of bankruptcy, and managers are encouraged to invest in high-risk projects

c. interest paid on debt is deduced from the firm's pretax income, thus reducing the amount of taxes that it owes

d. in an event of liquidation, creditors will get their claims over the firm's assets before common shareholders

e. An increase in debt financing beyond a certain point increases the risk of bankruptcy and financial distress